Robust economics for Baffinland’s Mary River project

It took four years and about C$170 million but the definitive feasibility study on its 100%-owned Mary River direct-shipping iron ore project was well worth the wait, Baffinland Iron Mines (BIM-T, BIMGF-O) says.

Assuming average sales prices of US$67 per tonne for lump ore and US$55 per tonne for fines, and based on the shipment of 18 million tonnes of iron ore (64.7% iron) a year, Mary River is expected to generate a pre-tax internal rate of return of 20.5%, with a payback period of 3.7 years, and an after-tax internal rate of return of 15.9%.

The definitive feasibility study also predicts a pre-tax cash flow over the life of the mine of an estimated C$18.1 billion, with after-tax cash flow of C$11.2 billion.

The lifespan of the Mary River iron ore project, 600 km north of the Arctic Circle, is expected to be 20 years, based on proven reserves of 160 million tonnes and probable reserves of 205 million tonnes.

According to metallurgical test work, Baffinland’s iron ore has a moisture content of 2% and a lump-to-fines ratio of 75%:25%.

“The uniqueness of our project is the 75% lump component,” Gordon McCreary, Baffinland’s president and chief executive, told analysts and investors during a conference call earlier today. “You get a 22% to 30% premium for lump, and that’s a huge driver in the economics, and no one comes close to that.”

McCreary also noted that there is a declining availability of lump in Europe Baffinland’s primary market. “Declining availability is our sweet spot,” he said. “We want to step into that void. We hope one day to own, so to speak, the European lump market.”

Initial capital costs of the project are expected to be in the range of C$4.1 billion, including a contingency of C$438 million.

Operating costs at Mary River and Steensby Inlet are estimated to be C$14.62 per tonne, excluding taxes and financing costs.

At the same time, iron ore prices are on the rise. Dow Jones reported on Feb. 18 that Vale had agreed to price increases ranging from 65% to 71% with Japanese, Korean and German steelmakers.

Baffinland will complete a scoping study this year to determine whether it can lift output at Mary River from 18 million tonnes a year to 30 million tonnes a year.

The company expects to complete a 250,000 bulk sample this year and has signed letters of intent with at least five different European steel mills.

Most recently Baffinland engaged co-financial advisors, CIBC and Citigroup, to help bring more strategic investors or minority partners on board.

The regulatory process for Mary River will be completed in 2010 with commissioning and startup of the project anticipated in early 2014. Full commercial ore shipments are scheduled to start in May 2014.

In an interview with The Northern Miner following the conference call, McCreary said he doesn’t expect to encounter any problems in clearing the upcoming regulatory hurdles and secure approval in 2009. The company expects to put out an environmental impact statement before the end of the year.

“There are no show-stoppers that we see,” McCreary said. “We have no processing plant, we are a quarry, we drill it, blast itand rail it to the coast and ship if off to the market. We don’t have a tailings pondour project is going to be as environmentally benign as any mining project can be.”

In terms of construction, one of the trickiest parts of the project will involve building a rail line from Mary River to the port at Steensby. While the first 40-km-stretch north of Steensby or the southern third of the route — is pretty solidly bedrock, the remainder includes permafrost and challenging ice lenses.

“The area that causes us the greatest engineering curiosity is the last 20 km into Mary River where there are buried ice lenses,” Rod Cooper, the company’s chief operating officer explained during the conference call. “There are a variety of engineering solutions that we can use and we can bypass other lenses.”

In Toronto, Baffinland’s shares closed up 4.7%, or 17 apiece, to $3.82, on a trading volume of 542,790.

The company has a 52-week trading range of between $2.15 and $5.04, and has 95.1 million shares outstanding.